Tailor Johnson, a U.S. maker of fine menswear, has a subsidiary in Ethiopia. Thi
ID: 2593295 • Letter: T
Question
Tailor Johnson, a U.S. maker of fine menswear, has a subsidiary in Ethiopia. This year, the subsidiary reported and repatriated earnings before interest and taxes(EBIT) of 206million Ethiopian birrs. The current exchange rate is 7.9549 birrs/dollar or S equals $ 0.1257 divided by birrS=$0.1257/birr. The Ethiopian tax rate on this activity is 23%. U.S. tax law requires Tailor Johnson to pay taxes on the Ethiopian earnings at the same rate as on profits earned in the United States, which is currently 37%. However, the United States gives a full tax credit for foreign taxes paid up to the amount of the U.S. tax liability. What is Tailor Johnson's U.S. tax liability on its Ethiopian subsidiary?
Tailor Johnson's U.S. tax liability on its Ethiopian subsidiary is $----------million. (Round to two decimal places.)
Explanation / Answer
With earnings of 206 million birrs and the Ethiopian tax rate of 23%, the tax paid in Ethiopia is 47.38 million birrs.
With an exchange rate of 0.1257/birr, the earnings amount to $25.89 million and the Ethiopian taxes amount to $5.96 million.
With a tax rate of 37%, the U.S. tax on Tailor Johnson’s Ethiopian income would be 0.37*25.89= $9.58 million.
However, Tailor Johnson is able to claim a tax credit of $5.96 million, for a net tax US liability of 9.58-5.96
= $3.62 million.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.